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General Mills, other food giants, seek out start-ups

April 5, 2016
Consumer Packaged Goods

When entrepreneur Austin Allan starts rolling out the next product line for his chilled soup company next year, he’ll be doing so with the quiet support of a big-name backer: General Mills.

The Minneapolis-based packaged-food giant is scouting and investing in promising food start-ups like Allan’s Tio Gazpacho, based in New York, in a bid to get in early on emerging grocery categories, particularly ones with health and wellness appeal.

Rather than risk being outflanked or surprised by hot, young food-industry disruptors, General Mills is partnering with entrepreneurs through its business development and venture capital arm, 301 INC, to take ownership stakes and help their businesses grow.

And they’re not the only ones who see the opportunity. Coke’s VEB unit, which stands for Venturing and Emerging Brands, invests in products with “billion-dollar potential” and has brought brands like Honest Tea and Zico coconut water into the company’s portfolio in recent years. Campbell Soup launched an external venture capital firm called Acre Venture Partners earlier this year.

301, which started ramping up investments in the past year, is setting up the potential for future acquisitions as General Mills looks to transform its product line toward more fresh, natural options. Health and wellness food products are a small category but one winning over Americans’ taste buds: Sales of natural and organic products grew more than 11% in the year ended Feb. 20, a period when overall food sales grew less than 2%, according to tracking firm Nielsen. Natural and organic foods make up 7.9% of all food sales in the U.S., up from 7.2% a year ago.

Already, 301 has led a $3 million fundraising round for Rhythm Superfoods, which makes snack chips made from veggies like kale and broccoli. That deal closed in January. It also holds minority stakes in Good Culture, a brand of organic cottage cheese with probiotics — live bacteria that are good for your digestive system — and Beyond Meat, a maker of plant-based burgers, meatballs and chicken strips.

“It gives us an opportunity to build that relationship early and to help accelerate their growth,” says John Haugen, vice president of 301, which led a $1.25 million funding round for Tio Gazpacho that closed last week. “Down the road it can create opportunities for those brands to become part of General Mills.” Haugen declined to say specifically how much the company has invested in Tio Gazpacho or any of the other companies.

Allan says he has no qualms about partnering with a company that counts Pillsbury cookie dough and Hamburger Helper among its products.

“It helps them reach new consumers and it helps them stay relevant,” he says. “I see that they’re moving in the direction of where food is going and we want to be a part of that. We want to help them on that journey.”

Allan’s company makes three — with a fourth coming in May — flavors of bottled organic gazpacho, the chilled Spanish tangy tomato soup. It sells for about $8 a bottle. He says he plans to use the 301’s investment on sales and marketing, includijng hiring and research and development for a less expensive line of soups that don’t rely on pricey organic tomatoes.

His brand is still small, with sales totaling less than $1 million in sales last year, and the soups are sold in the New York metro area. Allan has a staff of two, including himself, and works in a WeWork shared office space in the Chelsea neighborhood of Manhattan. He’ll continue to operate Tio Gazpacho independently, with General Mills acting as an advisor. For him, General Mills’ investment means a chance to become a national leader in a grocery category that doesn’t exist yet.

“We’re doing something that nobody else is doing,” Allan says. “I truly believe that they want to help us create this category because there’s a lot of potential for a portable soup.”

Start-ups say they can draw on the giant-size investors for product or marketing expertise. Allan says he has someone to call when he has questions like how to distribute his products more efficiently. Scott Jensen, CEO of Rhythm Superfoods, likes being able to ask General Mills’ scientists how to optimize the dehydration machines that make his company’s snack chips.

“I’m so so thankful because the technical expertise they have has just been like night and day for us,” Jensen says. “Sooner or later you’ve got smarter people available out there that help you get better.”

Big packaged-food companies are targeting small players as a way of reaching health-conscious consumers who might otherwise shun them. In the process, the giants can learn from the small, nimble start-ups.

“The challenge for these big food companies is trying to reshape themselves, because they’ve got big businesses,” says Jack Russo, consumer staples analyst for brokerage Edward Jones. “You don’t change overnight. They’re trying to identify some of these new trends and capture them.”

By Hadley Malcolm

Source: USA Today

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